This invention relates to investment finance.
Options trade on a variety of instruments and commodities. Typically, a “call” option gives the option holder the right to buy a given quantity of a given security or commodity to the option's counterparty at an established price. A “put” option gives the option holder the right to sell a given quantity of a given security to the counterparty at an established price. In an “American option,” the option may be exercised any time up to the expiration date. In a “European option,” the option may be exercised only on the expiration date.
“Swaps” are contracts to exchange one set of cash flows for another, or a contracted-for quantity of one security or commodity for a contracted-for quantity of another on a date certain in the future. For example, a “currency swap” is an agreement to pay x amount of one currency to receive y amount of another currency on an agreed date.
A “swaption” is an option to enter a swap. For example, a “currency swaption” is a contract that permits the option holder to demand a swap to pay x quantity of one currency and receive y quantity of another.
These are not formal definitions; rather they are only general explanations of specific cases of contracts that may be applied in a range of circumstances.